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Supreme Court says employer's group health plan entitled to reimbursement from recovery from third party

Employers' group health plans typically contain language that requires the participant to reimburse the plan for expenses paid if the participant recovers any damages or settlement from a third party, such as a negligent defendant or an insurance company. On Tuesday, the U.S. Supreme Court generally upheld these plan provisions against claims that they are subject to limitations through equitable defenses raised by the participant.

US Airways, Inc. v. McCutchen involved an employee who was injured off-work in an automobile accident. The employer's self-funded medical plan paid $66,000 in expenses. The plaintiff sued the other motorist, claiming over $1 million in compensatory damages. Due to policy limitations, the employee settled with the defendant's insurance carrier and his own for $110,000. After paying his attorney's fees, he received approximately $66,000. After learning of the settlement, the US Airways plan claimed right to reimbursement for the full amount based on plan language.

The employee contended that US Airways claim was limited by two equitable defenses. First, he was only able to recover a fraction of his damages, therefore the plan should be similarly limited in its reimbursement claim. Second, he contended that the plan should share in his payment of attorney's fees required to obtain the settlement.

The Supreme Court ended up splitting the baby. In a unanimous part of the opinion, the Court found that the plan's language provided for full reimbursement to US Airways regardless of his partial recovery of compensatory damages. The employee could not use the equitable defense of unjust enrichment to limit this reimbursement. The Court relied on both contract law and ERISA principles in reaching this conclusion. In a 5-4 portion of the decision, the Supreme Court allowed this recovery to be equitably reduced by the portion of the plaintiff's attorney's fees required to obtain the settlement. The majority concluded that the plan language did not address this issue, allowing equitable principles to apply.

Plan administrators will likely amend plan terms to close this loophole, and provide for full recovery regardless of the attorney's fee issue. In the end, plan participants are bound by the plan language regardless of the apparent fairness of the financial result.